Mortgages

My husband and I bought our first home in 1996. We took out a 20-year variable rate mortgage with the EBS in January of that year. Since then, we have been able to increase our monthly repayments and use savings to reduce the term of our loan. We now have approximately three years left on our mortgage, owing approximately £22,000.

Now that the mortgage interest rates have been reduced by several banks following the European Central Bank's recent cuts, we wonder whether it would be worthwhile to switch our mortgage to another lender offering a more competitive variable rate mortgage - e.g. Bank of Scotland. We know that we will not incur any redemption penalty but we only want to switch lenders if it will save us money and ideally reduce further the term of our mortgage. We assume that if we change lenders, we can still keep our home insurance policy with EBS.

Ms S.L., Kildare

As you have managed to bring a 20-year mortgage down to what is, at this stage, a mortgage spanning at most nine years, you are obviously well-versed in the need to work out how increasing payments and using your savings to reduce the capital sum can save you money in the longer run. You will not be surprised, therefore, to hear that there is no way of determining whether it would be better to stay with the EBS or switch without working out the figures for each option.

EBS was traditionally known for having among the most competitive rates available on the market for mortgages. However, in recent years that has not been the case, even before the arrival of Bank of Scotland. The question for you is whether there is much likelihood of the society closing the gap with the likes of AIB and Bank of Scotland in the relatively short time remaining on your mortgage.

Of course, you also have to weigh up the cost of any move. You say you will not incur any redemption charges but you will still have to assess any charges that a new lender would impose. These might include a new survey, legal charges, administration charges and others, but will probably vary from lender to lender.

As for your insurance, that is not from the EBS although it may well have been sold to you through the building society. This happens regularly to people who purchase insurance through the lender at the time they buy their home.

There is no reason why this should be affected by any move. After all, from the lender's perspective, all they require is an insurance policy that will cover any damage to what is, effectively, their asset, at least until such time as you pay off the mortgage in full. If the insurance policy is good enough for EBS there is no reason to doubt it will cover the needs of another lender.

However, having said that, the insurance policy is certainly something you should look at, especially for a couple who are keen to maximise their value for money.

You will normally find that policies sold alongside mortgages through the lender at the outset of the mortgage do not represent the best value on the market. In today's insurance market, where premiums are forecast to rise dramatically, you will want to shop around for the most competitive rate.

Eircom

I'm confused. Last week, you said that the Revenue had not yet made a decision on the split of the base cost between Eircell and Vodafone yet I thought I saw somewhere else that a decision had been made. What is the situation?

Mr A.V. Limerick

Well may you ask. This has been dragging on for months, leaving tax practitioners and their clients all at sea. The Revenue said that, when a decision was made, it would be communicated publicly through newspaper advertisements. They also said they would notify us. Needless to say they did neither. Still, at last the information is available.

The essence is that 43 per cent of the original Eircom price is accounted for by the post-split Eircom, with Eircell accounting for the balance of 57 per cent.

However, it's not quite as simple as that - it never is. There is a scattering of formulae, treatment of fractions of shares and a separate arrangement for bonus shares.

Still, back to basics. Every Eircom shareholder will have received one Eircom share and one Eircell share when the company broke out the Eircell division before selling it on to Vodafone.

On the first day of trade after this move, the shares traded at a range of prices, making it necessary for the Revenue to determine what the base price should be for the purposes of capital gains tax. In the end, the Revenue assessed the base cost of Eircom on the first day of trade after the merger at €1.11 and the cost of Eircell as €1.45406. This is where the percentages come from.

For those who bought at €3.90 at the outset, the capital loss on the Eircom portion of the share at that stage would be \3.90 x 1.11 / (1.11 + 1.45406)\ - 1.11. Rounding up to the nearest cent, this comes out at €1.69 - €1.11 = 58 cent per share. Trying to work it out simply by calculating 43 per cent of the purchase price does not work as the 43 per cent is, in itself, a rounded figure.

For those who held on until the successful Valentia offer, the loss would be €1.69 - €1.365, which equals 32.5 cent per share.

On the Eircell/Vodafone side, where every two Eircell shares acquired 0.9478 of a Vodafone share, the equation is as follows: €3.90 - €1.69 = €2.21 per Eircell share x 2 / 0.9478 = €4.66 per Vodafone share.

Given that Vodafone is currently trading at around £1.87 sterling and the euro/sterling exchange rate is around 0.62, the euro price of Vodafone is around €3.02, leaving Eircom shareholders with a paper loss of around €1.64 a share. Of course, the loss will not be realised until the shares are sold, by which time the situation may have changed.

People who bought Eircom shares at prices other than the flotation price can use the above formulae to calculate their gain or loss.

Bonus shares work under a different regime and have a base cost of nil. That means the full value of the share is liable for capital gains. Given that these shares were split at the time of the demerger of Eircell and would form part of the Vodafone shares now held by many original Eircom shareholders, shareholders will have to take one-twentysixth of their Vodafone shareholding and give that a nil base, giving the balance the post-merger base cost of €4.66.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.